Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Oil Page 5 of 6

Oil Prices and the economy for the next year to a year and a half

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On June 5, 2012

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Quick note, given I think that the economy is going to roll off a cliff in the new year, and soften between now and then, that means I think that oil prices are going to drop further.  I won’t be surprised to see them go under $50/barrel, unless something stupid like war with Iran happens.

Bernanke’s going to have to do quantitative easing again (aka. give money to banks) and may have to bail out Europe, since Europe probably won’t bail themselves out.  If Romney wins, Bernanke stands a good chance of losing his job, and he really doesn’t want that.  The conservative inflationist who replaces him won’t be noticeably different for the rest of the world, but if Bernanke is fired it’ll be the end of his legacy.  Yes, his legacy is depression no matter what, but he doesn’t see it that way, he thinks he can move to a stable Japanification scenario.  He can’t, but eh.

Oil prices dropping further will cause widespread unrest in the oilarchies, so expect more uprisings.  Also expect more slaughters.  The lesson of Mubarak is that if you give up power, you’re going away for life, so you might as well fight.  Lower oil prices will push Canada’s economy into the dirt, as well, but Harper has years to go on his mandate, so whatever.  A lot of oil sands projects will go bankrupt or into hiatus.

How long will the downturn last?  I don’t know.  Dropping oil prices means that there is room for growth, but the oligarchs want austerity so they can buy up more public goods and services on the cheap.  Privatization is the order of the day, and bankrupt states are what they want.

China has lost patience with the West. If the West won’t stimulate, then China doesn’t see why it should be required to carry the rest of the world’s economy on its back.

Things are going to get FAR worse before they get better.  That doesn’t mean there won’t be recoveries, there may even be a bit of one this year, but none of them will last, and none of them will do much good for anyone earning less than 6 figures.

What’s happening in Europe is what matters: rules of the financial rich

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On November 18, 2011

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The oligarchs have taken down two governments in the past two weeks – Italy and Greece.  The idea that the Mario Monti, the new PM of Italy, is something wonderful, is deranged.  Note that once again, neither an election nor a referendum was allowed.

If you want to save the Euro and some form of European prosperity, there is only one solution, the European Central Bank (ECB) must do what it keeps insisting it won’t do, it must buy Eurobonds from members.  And it must buy them at fixed prices.  Italian, Greek, French, German bonds will be issued at X price, and if insufficient investors want to buy at that price, tough, the ECB will buy.  If this causes inflation, great, Europe needs inflation right now.

Even France and to a lesser extent, Germany, are coming under attack.  However France is under significant attack, and Merkel and the ECB seem unwilling to really do anything about it.  France has the option to go off the Euro in a way that most other countries don’t.  The issue with going off the Euro is simple: oil prices.  You now have to buy oil with your lousy currency, which is even more worthless than the Euro.  But if you happen to control countries that have oil, like France does (for example, France is mostly in control of Libya right now, not the US), then hey, sign some long term contracts and voila.  It is not written in stone that prices must be set on open bid markets.

Which leads us to the sudden surge in the price of oil to $107 a barrel.  On the face of it, this is crazy.  Yes, the US has had a bit of a recovery, but Europe is going hard core austerity.  But this is the game the hot money is playing: they move out of bonds and into oil, out of oil and into bonds.  $107/barrel oil means the US recovery (such as it is, which isn’t much) isn’t going to last much longer.

Being rich is about being liquid when everyone else isn’t, so you can buy up assets on the cheap.  When the rich are properly under control (ie. when you keep them poor and terrified of government and the people, as they should be) they can’t create such buying opportunities, they have to wait for them, and the government makes it so that the rich can’t take too much advantage of them, because taking advantage of them means taking advantage of other people when they’re most vulnerable.

Right now the rich can and are crashing asset prices by forcing countries into austerity through attacks on their currencies and control of their elites.  They then buy up assets for fire-sale prices.  (The history of fire-sale is worth commenting on.  Crassus, the Roman Senator of the first triumvirate, had a fire fighting team.  When a fire broke out they’d go to the fire, fight off the other fire teams, then Crassus would buy the burning buildings from their owners, negotiating as they burned.  If they refused to sell, well, they lost everything.)

These attacks on currencies are deranged.  The countries are not in that much difficulty, certainly the idea that France is in enough difficulty to be under attack is crazy.  These attacks are about power: the global rich were bailed out after the crash, now they are using their hot money in attack after attack, demanding austerity, which will cause semi-permanent depression in those countries which accept it.  That allows them to buy up what they want, keeps their labor costs down, and lets them divert what money they spend on investment which creates actual real economic growth into developing countries which are cheaper for them.

But watching European leaders respond has also made clear that they are either compromised, ideologically neo-liberals or completely ineffective.  Watching the ECB insist that it won’t just buy bonds has been particularly amusing, because if the ECB won’t defend even France, the Euro is in great danger of not existing in a few years, and if the Euro doesn’t exist, neither does the ECB, which means all those central bankers will be out of jobs.  They won’t even act to save their own jobs.

All of this is crazy.  The financial elites are on a plundering spree, gleefully using their power to force entire nations into poverty, blackmailing governments into huge payouts.  Pay extra on bonds, or pay extra on oil, or hey, why not both!

The political elites are clearly either bought or completely ineffective at resisting.  If the ECB won’t buy bonds, then countries just need to leave the Euro so they can print money.  Yes, that might cause inflation and various other problems, but that is better than semi-permanent depression through austerity.

Now, what can the people do when the elites won’t allow direct referendums, and when there are elections you can only vote for parties which are all in favor of austerity?

Make them fear you.  Start as follows, which is what was done in Argentina: find their cars, those nice expensive cars, and trash them.  Every time you see someone in a suit coming from the airport, surround the car and slash the tires.

And if you’re going to riot, don’t do it in your own neighbourhoods.  Go to the parliament buildings, the bank HEADQUARTERS or to the neighbourhoods in which the rich live, and riot there.

If you insist on some form of pure nonviolence (which the European left and right don’t) then you must chain and twist tie yourselves around important areas.  Go to the headquarters and shut them down by tying yourself up to all the entrances.  Twist ties aren’t just the cop’s friends, they are yours.  Love them and learn how to use them.

The elites will only respond when they feel your pain.  And they will only feel it if you make them feel it.

The Depression and the future

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On June 5, 2011

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Ok, everyone’s talking about the oncoming recession.  What it is is the second downleg of the depression we’ve been in since the financial crisis.

All of this has been baked in since 2009.  Since January 2009, when Barack Obama announced his stimulus, which was not just too small, but put together so badly that it was evident it would not kick the economy out of the doldrums.  The stimulus would be seen to fail (it doesn’t matter how many jobs it “saved” what matters if it created a good economy.)  Meanwhile Obama made it clear he had no intention of restructuring the economy, shutting down any of the major banks or of disrupting the paper for oil securitization game.

So, anyway, what’s happened since 2009 was baked into the cake.  What is happening is what anyone halfway competent should have expected to happen and that includes the massive wave of austerity in the developed world, the high commodity prices, and the continued liquidation of public assets to feed private greed.  If anything it’s slightly worse than I expected.  I would have hoped that some nation other than Iceland would prove to have enough guts to tell the vultures to fuck themselves, but apparently we’re all eunuchs or morons these days, and the Greeks still aren’t rioting amongst the mansions of the rich, I notice.  So who cares what they think, anyway?

I suppose it’s tiresome to keep saying “I told you so”.  Certainly I’m tired of it, but the point is that this could all be predicted, was all predicted (well, not all, I didn’t get the revolutions in Arab countries, though I know someone who did and the clues were there.)  Assume that what is happening is, essentially, what your lords and masters are at least ok with having happen.  If they weren’t, it wouldn’t be happening.  This isn’t a case of incompetence, they didn’t even try to make this stuff not happen.

The future you’ve got coming from you is a future of unconventional oil extraction: aka fracking.  The play is to get back to cheapish oil and make that run for as long as it can.  That is what WILL happen.  That is baked into the cake.  The only economy these people want to run is an petro economy. They will do whatever it takes to run one and continue to use their position in control of legacy capital to extract rent and tax the future.  There will be more controls on so-called intellectual property (a contradiction in terms if there ever was one).  There will be more security theater.  There will be more austerity, which means taking public assets and turning them into what appear to be revenue producing private assets.

This will go on until the last drop of cheapish conventional oil has been pumped and the last suburb built.  Americans, and apparently the developed world, will do whatever is required to see this happen.  They will kill whoever they have to kill.  That’s what the developed world is, now.  This is only compounded by stupidity like Germany going off nuclear without a clear plan of how to replace the energy.  Remember, boys and girls, yes, there is blood mixed in with that oil.  A lot of it.

This the future, the next goodish economy will come from unconventional extraction.  Not sure how long that will last.  It will come at great environmental and health costs, but Americans will give up anything to keep the petro-economy going, so, so be it.

What’s this gonna mean for you?  The good jobs are going to keep getting scarcer, and if you aren’t willing to do evil (work for any insurance company, anything defense related, most good paying education jobs, most good paying healthcare jobs, virtually all financial industry jobs, etc…) then they will essentially non-existent.  Real wages after real inflation will continue to trundle down.  Even inflation adjusted wages as measured by the BLS may show declines.  Employment WILL NOT recover in your lifetime if you are over 40.  That doesn’t mean there won’t be ups and down, but it won’t have a long sustained up.  Financial markets will continue to be a rigged game, and if you want to play, realize you need to play as if the game is rigged, not as if you’re in a free market.

Unless you can pay premium, the quality of everything you buy will continue to go downhill. Want a good burger?  Closing in on $8.  Want a shitty fastfood burger?  $2 or less.  Public transportation will get worse, more libraries will close.  The cops will make less calls and be less helpful.  The schools will be worse in most places and keep getting worse.  Eventually Medicare will be slashed to the bone, and so will SS.  Not necessarily destroyed, but so weakened they might as well be.

It’s gonna be a long 20 to 30 years folks.  Does this have to be the future?  In theory, no.  In practice, well, yes, apparently it does.

Core CPI is exactly the wrong thing to watch

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On April 16, 2011

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Our lords and masters (h/t Americablog):

Those trends came as real income dropped 0.5 percent for the month.

The Labor Department said its Consumer Price Index increased 0.5 percent after rising by the same margin in February. That was in line with economists expectations.

Core CPI is vindication for officials at the Federal Reserve who have viewed the recent energy price spike as having a temporary effect on inflation.

Food and gasoline rose 0.8 percent, the largest gain since July 2008, after increasing 0.6 percent in February.

When thinking about inflation, think of individual’s (or companies) surplus income, that is, how much income do they have left to spend after their necessities.  Necessities include food, housing, heating and transportation.  To a lesser extent, clothes, though most people don’t need to buy clothes every month.

Goods inflation, that is to say, core inflation, is mostly in items that you don’t have to buy. Sure, you might want to, but you don’t have to have a new toaster, or TV, or computer.  Food, on the other hand, you have to have.  If you live off rapid transit, and most Americans do, then fuel for your car is something you have to have otherwise you can’t get to your job: you must buy it, at whatever price it is selling for.  Heating oil is something you have to have, freezing to death is bad.

If you earn $2k a month and your fixed bills come to $1,600, your expendable income each month is $400.  If oil and food rise enough that you have to spend an extra $50 you’ve lost 12.5% of your income.  If they rise enough to cost you $100 a month, 25%.  That margin is what matters to most people.  And for people close to the line, the extra money they must spend may kick them from surplus into a personal deficit, at which point they have to start borrowing money, usually at usurious credit card rates of over 20%.

The day laboring class is particularly vulnerable to this.  A bit of drying up of work, an increase in the price of food, and they can reach the point where they can’t afford to eat enough every day.  When that happens you either get a revolution, or you get famines.  This was particularly a factor, by the way, in Egypt.

Inflation in what people must have is what matters to most of the population.  But it isn’t what matters to your lords and masters.  Food costs and fuel costs, are, for them, roundoff errors.  If  you’re really rich, spending $1,000/day on food doesn’t even show on the scale.  So, by and large, goods inflation is what matters to them, personally, though they may have business concerns about fuel inflation (and note that inflation in oil leads to food inflation very directly.  Modern agriculture is how we turn oil into food, essentially.)

So when someone talks about core inflation being the most important form of inflation, check your wallet, it’s likely lighter than it used to be.

No Free Lunch

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On March 15, 2011

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I haven’t had much to say about the Japanese Tsunami and the nuclear mess there, but here’s the short and to the point.

First: the reactors in question were not properly built and tested.  It is very clear now that the Japanese nuclear industry, as with the American, has been cutting corners to save money.  Let this be a warning, there is no free lunch.  If you skimp on such features, it will inevitably come back to haunt you.  If you want to stop this sort of thing, start sending executives to jail for negligent homicide, otherwise expect it to continue.

Second: this is going to lead to a huge round of the stupids.  Contrary to what many on the left think, widescale solar is still not feasible, the production of large solar panels produces huge amounts of toxic byproducts.  So if Japan wants to go off nukes, they would most likely go off them to coal, and if you replace all those nukes with that much coal, it’s a complete environmental and health disaster, and a massive downshift in standard of living, to boot.

Third: Japan poured a pile of concrete in the last couple decades, including in the last 2 years.  They could have poured concrete over the backup generators in plants like this, instead of making roads to nowhere, but they didn’t.  Japan’s technocrats are, fundamentally, incompetent.  Perhaps not as incompetent as America’s, but in the same general boat, as are all the developed world’s technocrats.

The choice is being made, today, to deny, deny, deny reality.  The reality is that the energy bottleneck has to be dealt with.  And the reality is that the only technology ready right now, which can be scaled, which could tide us over the 20 years we need, is probably nuclear.  But the plants we have were designed not as civilian plants, but as dual use plants able to produce material for nuclear weapons.  They were deliberately designed to not be particularly safe and even the safety features they theoretically have, as with the Gulf disaster, have had corners cut so severely that they aren’t safe.

Nuclear power might be relatively safe, but not built by us, not by this society.  But the other options are disastrous as well.  As a practical matter, we are going to be moving more and move to coal, shale oil and tar sands oil.  And that economy is ugly as hell, and an environmental disaster.

I know a lot of my readers aren’t going to like this, and the anti-nukers are going to freak out in the comments thread, but this is where we are.

A bit more on the oil trap

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On February 27, 2011

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People will not ship or produce if the cost to produce+ship is higher than what they can recoup.  There is a bottom on prices despite what the idiotic supply and demand curves in textbooks show.  Contrary to what they tell you in economics 101 supply and demand is not a law, there are significant exceptions.

In fact, if the price of shipping increases enough to make production uneconomic, then people will be laid off.  When this is occurring throughout the world, you get a ripple effect.  It’s not self-reinforcing in the sense that it increases the price of oil (in fact, it decreases it), it is self-reinforcing in the sense that it does make the economy worse, because it reduces demand for a wide variety of goods, whether shipped or not.

What happens then is what we’ve seen before, the price of oil drops and you get a “recovery”, which is to say a pendulum from shitty economy to sucky economy and back again.  The current economic juggling act is about making sure the economy stays sucky, and doesn’t get to shitty, and you do that by keeping the price of oil from exploding.  When it does, you lose.

There can be no good global economy right now. There is not enough oil in the world to do it under current economic models.  Cannot be done.  You may be able to have a few places doing well, but only a few.  The solution to this is to GET OFF OIL, but no one is willing to allow that to happen, because old money wants to control the new economy and isn’t sure they can do that with current technologies.  That’s why you have idiots talking about shale oil, or using natural gas, or anything else which keeps an economy where a small group of people provide the energy for everyone else, and make a killing doing so.

So instead you have revolutions, you have unions being crushed and so on.  At its base this is all related to the price of oil.  Oil in Saudi Arabia costs about $7/barrel to produce.  Think about what that means in terms of profit, especially in a country where those profits stick to the hands of a few people.  Think about the fact that with all that money they could buy anything, unless the US has rich as rich as Saudi Princes and companies which are so large in terms of market capitalization that they can’t be bought.  (Well, or they could do ownership controls, but strangely, they prefer to be stinking rich.)

The rich MUST be kept rich.  If they aren’t, the oilarchies buy up everything.  That’s not exactly true, but it is true enough because that’s the way the people at the top think.  They know that they either stay so big they can’t be bought, or they’re bought.

Of course there’s more to this.  We could discuss regulatory and environmental (and labor, but labor is the smallest part of it) arbitrage to China (who refuse to allow outsiders to buy anything that matters, period.)  We could talk about the structure of the suburban economy, which is both profoundly unproductive and based on oil, so that any nation which embraces suburbanism can’t boom without driving up oil prices and, at this point, causing oil price spikes.  We could talk about financialization, but financialization is just a side-effect of needing lots of rich people and having less and less to sell to the world, which is about suburbanization, which is what the rich bribed the middle class with – you can have your little castle and your unearned unwarranted wealth increase in your unproductive suburb away from brown and black people, in exchange we get to be really, really rich.  Like all deals with the devil, of course, most people get cheated, but then when you decide you deserve money you didn’t earn and that being away from black people is important to you, you’ve already sold your soul.  The rich will find this out as well.

One way the price of oil hurts the economy

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On February 27, 2011

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Promoted from comments:

I work for a small freight forwarder. How small? My boss, and myself – that’s it. Last year we shipped over 61,250 million tons of beef, pork, and chicken; mostly to Australia and Hong Kong, but several smaller markets too. You pick up the product, stuff the container, and off it goes. At each point in the transport, whether it’s rail from Chicago to Long Beach, or Long Beach to the actual port, or port to destination, fuel is used and it adds to the total price. Never mind the fuel used in the production of the meat.

In addition to the cost of the space on freight, there is something called FSC – fuel surcharge; on ocean freight it’s called Bunker, or BAF. It was about 18% 2009-2010. Then 21% last quarter of 2010. 23% in January 2011. 26% this month and expected to go up next month from there. So, if your freight rate is 3500 bucks Long Beach to Sydney, you add another 900 bucks for fuel; on every shipment. As the railcars come in to Long Beach, they need to be unloaded and the product transloaded into containers, then dreyed to the ship – that’s about 800 bucks/container – most of that is fuel. So when the P of oil goes from sub-$100 to over $115/bbl (and don’t forget that everyone along the chain is adding their margins), it adds a huge cost. At a certain point the cost of doing business becomes unprofitable to continue doing business – that point is not far off in the shipping world. Have you noticed that the price of a tasty Rib-eye has gone from about $5/lbs to over $10/lbs recently? Most of that is fuel.

In a nut-shell you have the price of product rapidly increasing, resulting in lower demand, resulting in lower quantities ordered/shipped, resulting in product scarcity, resulting in higher prices yet, resulting in lower demand…resulting in lower revenue and therefore workforce reductions…ad naseum… That’s how the price of oil plays out.

I would add, as an aside, that in the longer term this is why I think the big box stores may be a lot less big and you may see a return to more local production.  This is especially true the farther you get from the coast, navigable rivers and canals, as ground transport sucks a ton more energy than sea transport.

Egypt, Revolutions and Food

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On January 26, 2011

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Zero Hedge notes something interesting about food prices post-Tunisia:

Dow Jones reports that wheat futures just hit a 29-month highs on “strong global demand.” Per the newswire, Algeria bought 800,000 tons of milling wheat, with traders estimating the nation’s purchases for January at about 1.8M. Turkey and Jordan bought wheat last week after rising food prices helped fuel unrest in Tunisia.

This is something Stirling Newberry predicted 10 years ago: that the end of the “great moderation”, 30 years of declining commodity prices, would lead to political instability.

Meanwhile Siun is reporting on the clashes in Egypt, in particular in Suez.  One part, from Egyptian blogger Zeinobia struck me in particular:

Again the people of Suez are suffering from terrible economic conditions as the factories owners there started to use cheap Asian labor instead of them creating a huge unemployment problem in the city.

That, as I have been discussing in the past is something very simple: betrayal of the ordinary citizens of a state (Egypt), by that state’s elites, for their own crash enrichment.  (I am for immigration, I am not for guest workers.  I am not for bringing in cheap labor to undercut one’s own labor.)

The future is as follows: decreased agricultural land, decreased water, decreased cheap oil (which is what our agricultural system rests on.)  The inflation figures say “there is no inflation”, but that’s a lie, pure and simple.  Food prices are up, energy is killing people and commodities are up.  So-called “core inflation” is mostly inflation in things people can do without (toasters, etc…) while fuel and food inflation is in what people MUST buy.  The same is true, btw, of health care inflation.  When you’re dying or in pain or crippled, you have to pay.

Virtually every oligopoly in the world is trying to grab as much money as it can by raising prices in collusion while not improving service or goods quality unless they absolutely much.  And if you can even buy the good stuff, it’ll cost your through the nose.  As one of my friends quips, “I buy organic meat and eggs and milk because when I was a kid, that’s just what we called meat and milk and eggs”.  Make the regular quality shit, charge for the stuff that isn’t crap.

Food and fuel are flashpoints, as will be water, but things like access to the credit economy (including the ability to pay by credit or debit card for things that can only be bought electronically, not with cash), reliable fast access to the internet, and so on, will also be crimped in any nation where the powers that be allow it.

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